Paycom Software
An Oklahoma company that runs payroll, tax filing and HR software for about 20,000 mid-sized American employers, all on one system it built itself.
The scores
Growth3/4 ↓
Organic revenue growth of 9% in 2025 and 11% recurring in Q2 2026, but slowing every year from 23% in 2023.
Business quality3/4 →
Retention near 91% rests on payroll switching costs, but it fell to 90% for two years and Rippling and Paylocity sell the same pitch.
Financial position3/4 ↓
Debt is new: $900M drawn against about $1B of guided adjusted EBITDA, due 2031, well inside covenants; before 2026 it had none.
Execution record3/4 ↑
Beat and raised in 2025 and 2026, but in 2023 it misjudged Beti's effect on revenue and faces a securities suit over it.
Per share capture4/4 ↑
Share count down a fifth in six months at about $128 a share, no convertibles, stock pay about 3% of revenue.
Potential2/4 →
It holds about 8% of its firm-size band, but more share needs sales capacity, retention and new modules, none committed.
Risk profile3/4 →
No customer concentration, but a founder who is CEO and chairman, rate-sensitive client-fund income and AI pressure on per-employee fees.
Valuation3/4 ↓
About 15 times guided free cash flow pays for the current business and modest growth, not a return to double digits.
Evidence quality3/4 →
Filed facts carry the numbers, but the savings, returning clients and free cash flow guide are management's words.
The Verdict
We rate Paycom neutral. It runs payroll, tax filing and HR software for mid-sized American employers, and the business is solid: payroll is painful to move, so about nine in ten revenue dollars come back each year. Growth has slowed every year for three years, and Paycom answered by cutting staff and borrowing to buy back shares. The price already counts on those one-time steps and asks only for modest growth, so it is fair, not cheap. The view hinges on growth: recurring revenue holding up through 2027 would make it cheap, a further slowdown would not. We think the easy gains are now in the price.
The long caseAmerican employers are adding almost no jobs, so Paycom gains only by replacing HR paperwork with its software; its client count must keep growing.
The evidence under this - 8 claims
- On trailing free cash flow of $575.1M the multiple is 17.3 times and the yield 5.8%, implying about 3.2% growth; and 2026 cash flow is helped by a tax deferral and lower capital spending, so the forward figure flatters.
- The 9% required return is an assumption; at 10% the implied growth is about 3.5%.
Management has guided low and beaten in both 2025 and 2026, and said Q4 carries a tough comparison it smooths across the half, so the implied slowdown may be caution rather than a forecast.
The company
Every company has to pay its staff correctly and on time, and send the right taxes to federal, state and local governments. Get it wrong and the tax authorities charge penalties.
Paycom sells software that does this, plus hiring, time tracking, benefits and reviews, from one database. Its buyers are employers with roughly 50 to 10,000 staff: 39,199 client accounts at the end of 2025. The alternative is ADP, Paychex, Paylocity, an older system, or a payroll clerk with a spreadsheet.
The evidence under this - 3 claims
How it makes money
Clients pay a fixed fee each pay period plus a fee for every employee or transaction, so revenue grows with clients, with modules sold to them, and with their headcount.
A second, smaller stream is interest: Paycom holds clients' payroll money for a few days before paying it out and keeps the interest, about 5% of revenue, which falls when interest rates fall.
The evidence under this - 3 claims
Where the money comes from, stream by stream
| Stream | Share of sales (FY2025) | How it earns it |
|---|---|---|
| Recurring and other revenue | 94.5% | Fees per pay period and per employee for payroll and HR applications, tax filings, checks and background checks, plus implementation fees and time clocks. |
| Interest on funds held for clients | 5.5% | Interest earned on client payroll and tax money held between collection and payment, so it moves with short-term rates. |
| Implementation fees and time clocks (within recurring and other) | not disclosed | One-off set-up fees of 10% to 30% of a deal's annual value, recognised over time, and hardware sales; not reported separately. |
Who runs it
Chad Richison founded Paycom in 1998 and still runs it as chief executive and chairman; a new finance chief arrived in 2025 and a president in 2026. Insiders own about an eighth of the company, almost all of it his, and he plans to sell some from December. Most of the bonus rides on sales growth, with a profit check; nothing rewards cash generated or results per share.
The evidence under this - 4 claims
- No measure pays on free cash flow, per-share results or return on capital, so the debt-funded buyback of 2026 (C13, C14) and the cost of growth (C40) cost the plan nothing.
- The PSUs measure one year, chosen because multi-year targets were hard to set, and half the equity vests on time alone.
Why it wins, and who could beat it
Why customers come back
Clients can leave on 30 days' notice, yet 90% to 91% of revenue has stayed each year since 2022. Moving payroll means moving years of pay and tax history, retraining every employee, and risking mistakes.
Mistakes are expensive. The IRS charges 2% to 15% of a late payroll-tax deposit and assessed over 1.2 million such penalties in fiscal 2025. Against that, Paycom costs about $101,000 a year per client company.
The evidence under this - 4 claims
The 7.4 million records include everyone employed during the year, so the price per employee on the payroll at any one time is higher; revenue also includes interest on client funds.
The threat
Paycom's pitch, one system instead of many, is no longer unique. Rippling, a private rival valued at $16.8B, sells the same idea across HR, IT and spending, and Paylocity names Paycom as a direct competitor. Retention dipped to 90% in 2023 and 2024, so clients do leave.
The evidence under this - 3 claims
Retention recovered to 91% in 2025 and management reports clients returning from cheaper rivals, which suggests leaving is costly enough that some regret it.
The rivals: PCTY, ADP, PAYX, and 1 more that is private, in-house or listed abroad.
Who else does this, rival by rival
| Ticker | Rival | How far along | Priced against it |
|---|---|---|---|
| Private | RipplingPriced against it: Private | On sale | Private |
| PCTY | PaylocityPriced against it: Yes | On sale | Yes |
| ADP | ADP Workforce NowPriced against it: Yes | On sale | Yes |
| PAYX | PaychexPriced against it: Yes | On sale | Yes |
How big it could get
How big this could get
The Census Bureau counts 245,508 US firms with 50 to 4,999 staff, employing 51.7 million people. At Paycom's prices that is roughly $14B a year of spending.
Paycom serves about 8% of those firms today. The pond is not growing much: US payroll jobs rose just 0.38% in the year to August 2026, so growth has to come from winning clients and selling them more.
The evidence under this - 4 claims
Paycom's clients include firms below 50 and above 5,000 employees, and its record count includes departed staff, so both ratios overstate its share of the band.
The 7.4 million records include everyone employed during the year, so the price per employee on the payroll at any one time is higher; revenue also includes interest on client funds.
The results
The numbers
Sales grew 9.2% over the twelve months to Jun 2026, about the same pace as the 8.9% in the year to Dec 2025.
Operating margin is 30%, up from 27% in the year to Dec 2023.
Running costs take 53¢ of each sales dollar, down from 61¢ in the year to Dec 2021.
Each dollar put into the business earns 28% a year after tax, about where it was (24%) in the year to Dec 2021.
Yearly sales growth has ranged from +8.9% to +30% over the last 5 years.
The share count fell 21% in 4.5 years.
All the numbers
Filed figures from the company's 10-K and 10-Q, read 2026-10-04. Fiscal years end in December.
| Dec 2021 | Dec 2022 | Dec 2023 | Dec 2024 | Dec 2025 | 12 mo to Jun 2026 | |
|---|---|---|---|---|---|---|
| Size and growth | ||||||
| Sales | $1.06B | $1.38B | $1.69B | $1.88B | $2.05B | $2.14B |
| Sales growth | +25% | +30% | +23% | +11% | +8.9% | +9.2% |
| Profit | ||||||
| Gross margin | 85% | 85% | 84% | 82% | 83% | 84% |
| Operating margin | 24% | 28% | 27% | 34% | 28% | 30% |
| Net margin | 19% | 20% | 20% | 27% | 22% | 23% |
| What growth costs, per sales dollar | ||||||
| Research and development | 11% | 11% | 12% | 13% | 14% | 12% |
| Sales and marketing | 26% | 25% | 25% | 23% | 24% | 23% |
| General and admin | 20% | 17% | 17% | - | - | - |
| Pay in shares | 9.2% | 6.9% | 7.7% | −1.2% | 5.8% | - |
| Capital spending | 11% | 9.6% | 11% | 10% | 13% | - |
| Cash | ||||||
| Cash from operations | $319M | $365M | $485M | $534M | $679M | - |
| Free cash flow | $199M | $232M | $292M | $341M | $408M | - |
| Balance sheet | ||||||
| Cash and short-term investments | $278M | $401M | $294M | $402M | $370M | $198M |
| Debt | $29.2M | $29.0M | - | - | - | $900M |
| Net cash | $249M | $372M | - | - | - | −$702M |
| Returns and shares | ||||||
| Return on capital | 24% | 26% | 26% | 34% | 25% | 28% |
| Shares (diluted) | 58.2M | 58.2M | 58.0M | 56.3M | 56.1M | 45.9M |
What growth costs
Growing has not made Paycom more profitable lately. Selling and office costs shrink as a share of sales, but the savings went into building software and data centres, so margins stayed level while growth slowed. This year's jump in profit came from cutting a fifth of staff, which cannot repeat.
The evidence under this - 3 claims
- 2024 read 33.7% operating margin and 8.4 cents of general and administrative only because a $117.5M stock-pay reversal on the founder's forfeited 2020 award ran through that line; without it the margin was about 27.4%.
- Over the four quarters to June 2026 expensed R&D fell to 12.1 cents and operating margin rose to 30.3% after the 2025 staff cut (C10, C12).
Selling and admin costs per sales dollar did fall every year bar the reversal year, so scale is working on those lines; it is the deliberate rise in development and capital spending that absorbs it.
- The CEO says automation touches every department and continues, and total R&D fell again in Q2 2026 after the year-end headcount count, so part of the saving may still be arriving.
- The CEO also said on the Q2 call that there is a limit on labour efficiency, which supports the inference.
The last report (5 Aug)
Quarter ended June 2026, filed figures.
In Q2 2026 revenue rose 9.8% and the recurring part rose 11.0%, up from about 9% in the first quarter. Profit rose faster: spending on product development fell 40% as the smaller staff and in-house AI tools did more of the work.
Management raised the 2026 forecast to 7% to 8% revenue growth and a record 46% cash profit margin. The fine print matters: the raised forecast still implies recurring growth of only 6% to 8% in the second half.
What it did to the thesisIt showed the staff cuts and in-house tools lifting profit, which the case expected. It did not show lasting faster growth: the raised forecast still implies a slowdown later in the year. That leaves the view Neutral, with the price fair for modest growth.
The quarter in detail
Sales growth from the previous quarter, filed figures. The company has restated its own history, so a quarter either side of the restatement may describe a different business; n/c marks one that does not compare.
Earnings per share $2.78 against $2.38 expected; $2.34 as filed, the gap being what the company adds back.
The evidence under this - 4 claims
The February guide of 6% to 7% was beaten, but the raised guide still implies second-half recurring growth of about 6% to 8%, below the 11% of Q2 (C08).
Management has guided low and beaten in both 2025 and 2026, and said Q4 carries a tough comparison it smooths across the half, so the implied slowdown may be caution rather than a forecast.
What management did with the money
In the first half of 2026 Paycom bought back 10.9 million shares at about $128 each, a fifth of the company, and borrowed $900M to pay for much of it. Insiders sold small amounts and bought none.
Insiders in 2026Q2: 6 purchases and 4 sales, from their Form 4 filings.
The evidence under this - 3 claims
The price, and where we disagree
In short. Fair, not cheap. The price already counts on the staff cuts and share buybacks, and asks only for modest growth, which is roughly what the company forecasts.
The shares fell from $217 in September 2025 to $114 in April 2026 as investors feared AI would shrink HR software, then jumped 23.6% the day after Q2 results and have nearly doubled.
Over the year the business per share grew about a third while the price barely moved, because the buyback shrank the share count. The next test is Q3 results on 4 November; the founder may start selling up to 1.09 million shares from December.
The evidence under this - 4 claims
Management has guided low and beaten in both 2025 and 2026, and said Q4 carries a tough comparison it smooths across the half, so the implied slowdown may be caution rather than a forecast.
How we read the multiple
Paycom's shares are worth about $9.94B, about 15 times the more than $650M of spare cash it expects in 2026. That forecast is flattered by a fading tax break and lower equipment spending. On the company's own cash for the last twelve months, the price is about 17 times.
For a buyer to earn 9% a year at that price, that cash needs to grow only about 2.5% a year for ever. That looks easy, but growth has fallen every year for three years.
Against its own history. Buyers pay far less for each dollar of cash than they did in past years, because growth has fallen by more than half, not because the market missed something.
The evidence under this - 4 claims
- On trailing free cash flow of $575.1M the multiple is 17.3 times and the yield 5.8%, implying about 3.2% growth; and 2026 cash flow is helped by a tax deferral and lower capital spending, so the forward figure flatters.
- The 9% required return is an assumption; at 10% the implied growth is about 3.5%.
No filing breaks out either saving; 2025 capital spending was $270.9M against $192.9M in 2024, and the 10-Q says the 2025 tax law cut cash taxes in the second half of 2025 and first half of 2026, which flatters 2026 cash flow and fades.
Priced against its rivals
The competitors its own annual report names, each confirmed against the rival's filing. Measured on price for each $1 of spare cash, cheapest first:
| Ticker | Company | price for each $1 of spare cash |
|---|---|---|
| PAYC | Paycom Software | 13.2× |
| PCTY | Paylocity Holding | 17.1× |
| PAYX | Paychex | 17.9× |
| ADP | Automatic Data Processing | 21.2× |
The middle of the other 3 is 17.9. Paycom Software, Inc. is cheapest of 4.
Rivals' figures come from a data provider, so read the spread of the group rather than any single pair.
It is the cheapest of its listed payroll rivals on free cash, which fits its slower growth rather than contradicting it.
Private or foreign rivals that cannot be priced: Dayforce, Inc., Ultimate Kronos Group.
Where we disagree with the market
AI is Paycom's friend: automation keeps lifting margins and buybacks keep lifting earnings per share, so the fall to April was a mistake.
The margin step and share cut were one-time and are now in the price, while the company's own forecast shows growth slowing again.
The market read the Q2 jump in profit as proof that AI makes Paycom stronger. We agree it helps, but the big gain came from cutting 21% of staff and a fifth of the shares, and neither can happen again at that size.
We would be wrong if recurring growth stayed at 9% or more through 2027 with retention above 92%; then today's price would be cheap.
What analysts say, and the evidence
The evidence under this - 5 claims
- The CEO says automation touches every department and continues, and total R&D fell again in Q2 2026 after the year-end headcount count, so part of the saving may still be arriving.
- The CEO also said on the Q2 call that there is a limit on labour efficiency, which supports the inference.
Management has guided low and beaten in both 2025 and 2026, and said Q4 carries a tough comparison it smooths across the half, so the implied slowdown may be caution rather than a forecast.
The February guide of 6% to 7% was beaten, but the raised guide still implies second-half recurring growth of about 6% to 8%, below the 11% of Q2 (C08).
What could go wrong, and how we would know
The risks
- Clients can walk. Contracts end on 30 days' notice, and Rippling and Paylocity sell the same one-system pitch to the same employers.
- AI could shrink headcounts. Paycom charges per employee, and US job growth is near zero; offices cutting staff with AI would cut its fees.
- Debt is new. Paycom borrowed $900M in 2026 after years with none; more buybacks would mean more borrowing.
- One founder decides. Chad Richison is chief executive and chairman with 13.1%, and the two new directors are former Paycom executives.
- It has misjudged itself before. In 2023 its own Beti product cut the extra payroll runs it charged for; the shares fell 38.5% in a day.
- Rates cut interest income. About 5% of revenue is interest on client money, which falls as rates fall.
The evidence under this - 7 claims
Retention recovered to 91% in 2025 and management reports clients returning from cheaper rivals, which suggests leaving is costly enough that some regret it.
US payroll employment grew only 0.38% in the year to August 2026 (C28), so stable means flat, and any AI-driven cut in office headcount at clients would reduce per-employee fees.
What we still do not know
- How much revenue is charged per employee rather than per pay period; Paycom calls its pricing proprietary.
- How much of the 2026 margin gain repeats in 2027.
- How often mid-sized employers switch payroll vendors, and how many Rippling has won from Paycom.
The evidence under this - 4 claims
- The CEO says automation touches every department and continues, and total R&D fell again in Q2 2026 after the year-end headcount count, so part of the saving may still be arriving.
- The CEO also said on the Q2 call that there is a limit on labour efficiency, which supports the inference.
Retention recovered to 91% in 2025 and management reports clients returning from cheaper rivals, which suggests leaving is costly enough that some regret it.
What would change our view
- Neutral→AttractiveA cheaper price on unchanged execution
It needs all of:
- ○The shares fall to 12 times the free cash Paycom forecasts for 2026, with that forecast still met.about $172.91 today, 22% below the last close
- ○Recurring revenue grows 8% or more in Q3 2026.checked at the next results, due by 4 Nov
- Neutral→AttractiveGrowth re-accelerates with retention
It needs all of:
- ○Revenue retention for 2026, published in February 2027, reaches 92% or more.checked at the next results, due by 4 Nov
- ○Paycom's 2027 forecast puts recurring revenue growth at 9% or more.checked at the next results, due by 4 Nov
- Neutral→UnattractiveClients start leaving or growth stalls
It needs any of:
- ○Revenue retention for 2026 falls below 90%.checked at the next results, due by 4 Nov
- ○Recurring revenue growth falls below 6% in any quarter.checked at the next results, due by 4 Nov
We would also be wrong if
- Paycom's 2027 forecast puts its cash profit margin below 44%.
- The number of client companies falls during 2026.
What is coming
- 4 November 2026 Q3 2026 results: Whether recurring revenue grows 8% or more against a guide implying 6% to 8% for the half, and whether the full-year guide holds.
Every dated event ahead
- 4 November 2026 Q3 2026 results: Whether recurring revenue grows 8% or more against a guide implying 6% to 8% for the half, and whether the full-year guide holds.
- December 2026 Founder's plan to sell up to 1.09M shares opens: How much of his stake the founder sells through June 2027; a steady drip is planned, a faster pace or a larger plan would say more.
- February 2027 Q4 and full-year 2026 results, with the 2027 guide: Whether free cash flow cleared $650M as promised and whether 2027 profit grows near revenue once the one-time staff and development savings are lapped.
Since we wrote this
- 5 OctThesis reviewThe long case now sits under the verdictAfter the five-name pilot, the owner asked for the long case on every thesis.
- 4 OctThesis reviewOwner's checklist: revenue streams, cost of growth, management, catalystsThe owner's checklist found the method silent on who runs the company, what growth costs, where the money comes from and what is dated ahead; this pass fills those four blocks from the proxy and filings.
- 27 SepThesis writtenNeutral, medium convictionWritten five weeks before Q3 2026 results, after the Q2 beat and a first half that cut the share count by a fifth.
Also checked 2 times with nothing new to act on.
Sources 22
Sources - 22
Every claim above cites one of these, or states the reasoning that derived it. The quote is frozen at the date it was read: a link can rot, and an agent fetch returns a reading of a page rather than the page. Backs counts the whole claim ledger, so it can name a claim this page does not surface.
- S01primarycompany filing2026-02-19business description, client counts, revenue retention, employees, sales teams, competitors, risk factors, the Beti securities suit, cash flow statementbacksC01C02C03C04C05C09C11C16C17C32C34C37C38C39C44
- S02primarycompany filing2026-08-06revenue split, cost lines, R&D capitalisation, stock pay, credit facility, buybacks, share count, cash flow, client fundsbacksC06C10C11C13C14C16C17C18C33C37C44
- S03primarycompany release2026-08-05raised 2026 guidance, adjusted EBITDA, quarter buybacks, shares outstandingbacksC06C07C13
- S04primarytranscript2026-08-05Paycom Q2 2026 earnings call transcriptmanagement on AI hosting savings, free cash flow above $650M, recurring guide of 8% to 9%, client employment, sales reps; questions from twelve analysts including Barclays, Jefferies, Citi and Baird
Last year, we spent over $100 million to prepare data centers to host our own AI models. This year alone, that spend will lead to about $100 million savings in R&D and another $30 million or more in IWant response fees that would've come from a third party.
backsC07C11C29C35 - S05primarycompany release2026-02-11full-year 2025 results, the original 2026 guide, client counts and employee recordsbacksC02C05C07
- S06primarytranscript2026-02-11Paycom Q4 2025 earnings call transcriptretention commentary, returning clients, the restructuring, the CEO on AI as a threat
we're having a record number of clients returned to Paycom as they left for maybe something that they felt was a lower price but ended up being 10x our cost
backsC09C20 - S07primarytranscript2026-05-06Paycom Q1 2026 earnings call transcriptmanagement on the buyback and the share price, IWant usage, pricing held flat, an analyst asking whether retention returns to 93% or 94%
right now our stock doesn't really trade, I don't believe, off what we do. It kind of trades based on the AI prophecy of the day.
backsC20 - S08primarycompany filing2024-02-15revenue retention for 2022 and 2023, 7,308 employeesbacksC03C09C39
- S09primarycompany filing2025-02-20revenue retention for 2023 and 2024, 7,306 employeesbacksC03C09
- S10primarycompany filing2025-11-06Q3 2025 recurring revenue of $466.5M, the base for the next testread, but no claim rests on it
- S11primarycompany filing2026-08-05a rival naming Paycom as a competitor for the same employersbacksC22
- S12primaryother2025-05-09the rival's valuation and its single-platform pitch, in its own words
The financing values the company at $16.8 billion. ... We currently offer over two dozen products across HR, IT, and Spend - everything from payroll and benefits, SSO and identity management, to bill pay and corporate cards. ... Rippling solves this problem by helping companies manage and automate every part of the employee lifecycle in a single platform
backsC21 - S13primaryregulator2026-09-27IRS, Internal Revenue Manual 20.1.4, Failure to Deposit Penalty Internal Revenue Servicewhat a late payroll tax deposit costs an employer
For liability amounts not properly or timely deposited, the penalty rates are as follows. 2 percent for deposits 1-5 days late, 5 percent for deposits 6-15 days late, 10 percent for deposits made more than 15 days late
backsC24 - S14primarygovernment data2026-09-27IRS Data Book FY2025, Table 4-2, Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty Internal Revenue Servicehow many employment-tax penalties the IRS assessed in fiscal 2025
Table 4-2. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty ... Employment taxes: Civil penalties, total 4457891 ... Federal tax deposits 1216346
backsC24 - S15primarygovernment data2025-04-10U.S. Census Bureau, Statistics of U.S. Businesses 2022, detailed enterprise employment size table U.S. Census Bureaufirms and employment by firm size, summed over the 50 to 4,999 bands
The Number of Firms and Establishments, Employment, Annual Payroll, and Receipts by State, Industry, and Enterprise Employment Size: 2022 ... United States, Total, 01: Total, 6395635 firms, 135748407 employment ... 12: 50-74 employees, 89207 firms, 5366080 employment
backsC26 - S16primarygovernment data2026-09-27BLS All Employees, Total Nonfarm (PAYEMS), via FRED U.S. Bureau of Labor Statisticsthe year's change in US payroll employment
All Employees, Total Nonfarm, Thousands of Persons, Monthly, Seasonally Adjusted: 2025-08-01 158472.0; 2026-08-01 159075.0
backsC28 - S17secondaryvendor data2026-09-27Research pack, frozen 2026-09-27 (FMP market data, filed cohort, FINRA short interest)price history, decomposition, analyst split, short interest, cohort multiplesbacksC15C16C17C18C19C32
- S18primarycompany filing2026-09-03the founder's stake and the September 2026 sales planbacksC30C36
- S19primarycompany filing2026-09-27Paycom insider Form 4 filings read by insider_fetch.py, 2025-11 to 2026-09eight discretionary sales, no purchasesbacksC31
- S20primarycompany filing2026-07-09the two new directors and their past rolesbacksC36
- S21primarycompany filing2026-08-05cohort membership: both describe payroll and HR outsourcing to the same employersread, but no claim rests on it
- S22primarycompany filing2026-04-02executive officer biographies, beneficial ownership as of March 11, 2026, the 2025 annual incentive and PSU goals and payouts, the 2025 CEO pay frameworkbacksC41C42C43